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Estimating Price Elasticities with Non-Linear Errors in Variables

Innovations in Methods and Data

This paper estimates a price elasticity using a flexible demand specification on survey data where prices are observed with error are correlated with household characteristics. The demand function is modeled as being a polynomial (and more generally also including trigonometric terms) in the unobserved true prices and the form of the dependency between the observed (mismeasured) prices and household characteristics is modeled parametrically. I identify and estimate the model by adapting the approach of Hausman, Newey, Ichimura, and Powell (1991) and Schennach (2004). The flexible specifications allow us to observe that price elasticities vary across the price distribution, something missed in previous work using linear demand specifications.

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Aprajit Mahajan
Alessandro Tarozzi
Joanne Yoong
Brian Blackburn
Publication Date
December, 2009